Study loans: Handle with care

The unprecedented Covid-19 pandemic has hit one and all in one way or the other. Millions of people have either completely lost jobs, suffered salary cuts or were furloughed. This scenario has left household incomes in disarray. With incomes getting badly squeezed, the households have been financially struggling to adjust to the given situation and keep their kitchens decorated and alive. Among other adverse things, their capacity to repay loans has been adversely affected despite the Reserve Bank of India’s (RBI’s) EMI moratorium for a certain period.

Though all kinds of borrowers are in trouble now as they lack sufficient source of income to fund their loan repayment schedule, yet it’s the student borrowers segment who are facing extreme stress on account of repayment of their education loans. Firstly, their parents who are co-borrowers in their loans are currently facing the EMI heat as they have been facing financial crunch due to Covid crisis. Secondly, the student borrowers don’t see a job prospect in immediate future as companies and other avenues are yet to adjust to the new Covid-induced norms. This has left no chances of hiring new manpower in near future.

For students, pursuing any expensive courses anywhere in the world has not been a problem. Banks are liberally giving loans to students, whether it is to pursue a degree abroad or from a premier institute in India.

Actually the concept of liberal financing through education loan scheme is aimed at nation building.

However, the impact and performance of the scheme in pre-Covid times reveals some startling facts.
The very basic concept of shaping the young talent to contribute in nation building is being defeated. Education loans have emerged a new stress factor among students, particularly among those who have completed their studies and have been hunting for a job for quite some time now. Thus, impairing their ability to service loans taken by them to fund their higher education.

The easy access to education loans has also lead to emergence of a large number of sub-standard educational institutions run with poor infrastructure and under-qualified faculty. This has direct bearing on the job market as the message has spread far and wide about ‘average’ young talent passing out of these poor institutions.

Precisely, with the burden of loans on their shoulders, students could face severe psychological pressures, affecting their educational performance during studies and labour market performance after studies. This burden changes the attitude of students and of society as a whole with dangerous implications not only for the development of education, but also for the very social fabric and national development.

For banks too, student loans are emerging as a new headache. These loans have been going bad at an alarming rate.

Notably, education loans worth Rs 11,000 crore have been disbursed in the 12 months through September 2020, according to data from CRIF High Mark, a credit bureau. A bulk of the disbursals happened through the pandemic period with more than 3 lakh new borrowers signing up for loans between March and October 2020.
As of October 2020, the outstanding education loans summed up Rs 1 lakh crore, the highest on record.

Even as Covid-induced financial crisis derailed repayment capacity of most of the borrowers in education loan segment, the fact is that banks were also facing stress on such loans in pre-covid situation. Why default in education loans has been rampant?

Liberal financing under education loan segment makes a student to choose any course with a scant attention to its job prospects. After completing such courses, they struggle to get a job.

In other words, students join a course just because loan facility is available. We have come across instances where students have fallen in the trap of several low quality educational institutes by showcasing their tie-up with banks. This kind of luring has marred the ability of students and their parents to decide the institute and course to be pursued.

There is a huge number of students who avail top-up loan facility to pursue higher studies in their chosen stream. For example, a student has taken an education loan for graduation. Once he completes the graduation, he again avails education loan facility to complete his post-graduation. This way the student compounds his liability. This is in no way good for the students. Majority of them ultimately land in loan defaulters list.

It has also come to the fore that the co-borrowers (parents/guardians) using take upper limit of loan available under the scheme without evaluating their repayment capacity. It’s precisely a blunt mistake.

What are things parents need to consider while pursuing for an education loan for their children?

There are certain things which parents need to consider before taking route of education loan. Parents need to check the future demand of the education course for which they are approaching a bank for the loan. It’s important because loan is not a charity. It’s a liability and is to be repaid along with interest. Once satisfied that the course to be pursued by their child has bright financial prospects in future and bears no risk of future financial complications, they should explore the option of taking education loan.

Besides, the parents have to keep it in mind that the repayment liability is on the student after completion of the course. The most important for a student borrower is not to default. Notably, repayment of an education loan starts six months after getting a job or one year after the completion of the course, whichever is earlier. They should use the grace period, to plan some part repayment. They can build a corpus during the moratorium period which they can later use to service their loan account. And at the same time explore to pay interest portion monthly to lower equated monthly installments (EMIs). Many banks also give a 1 per cent interest concession to those who repay the interest during the moratorium period. So, it’s not wise to explore this option.

How can a default in repayment affect the students?

A default spoils the credit score of both the student and parents (co-borrowers). If EMIs are not paid on time, the bank classifies the loan as a non-performing asset (NPA). This will have adverse impact on the credit history of the student and he/she will face difficulty in accessing other loan facilities in future. So, a repayment strategy in place before EMIs start is a must. If possible, do not take the entire loan in one go but in installments. This will reduce the interest burden.

What can existing education loan borrowers do?

The borrowers should not hesitate to share their difficulties with the bank if they are facing financial constraints. May be the bank gets convinced to reschedule your loan repayment or there is possibility that the bank would be tailoring a financial solution to get you out of the financial mess.

In August 2020, the Reserve Bank of India (RBI) allowed a one-time restructuring of loans without classifying them as NPAs to help companies and individuals manage the financial stress caused by the Covid 19 pandemic.

As per the guidelines issued by RBI in August, the resolution plan for personal loans (which includes education loans as per the RBI classification) may include conversion of any interest accrued/to be accrued into credit facility, rescheduling of payments and granting of the moratorium for maximum 2 years based on borrower’s income stream assessment. The RBI has allowed banks to modify the overall tenor of loan restructured accordingly.

What about subsidy on education loans?

The Ministry of Education offers subsidies to students belonging to the Economically Weaker Section (EWS) category. The eligibility criteria requires that the student’s family’s gross annual income not exceed Rs 4.5 lakh. The interest accrued on the loan during the course plus one-year moratorium will be paid by the Government of India.